Ever the true pragmatist, can do, dig us out of the ditch, cut to the chase, kind of guy,…you are the man, the Krugman who can point us forward, speak the truth and get this magilla back on track,…thanks for pointing out that we, the taxpayer are getting fleeced again,…Keep turning the screw on the banks, government, revealing the waste, ineptitude and downright malfeasance still at play as they work in tandem to get themselves the best deal ever for the shareholders while holding ‘we the people’ hostage to an ever untenable meltdown, stay down,…We keep trying to stand up, stay up and the powers that be here keep loading our backs,…Untenable forever,…

One of my arguments over the years has been that money is a tax based public utility and our current financial system is a transition state between private banks issuing private currency, to now a publicly supported currency leased out to a private banking system and the next step will be a public banking system that will be incorporated at all levels of government, so that profits are re-cycled back through the communities which created them and depositors would naturally bank with those institutions that supported the services they are most likely to use. Competition would be a function of the various communities trying to provide the best environment for people and business.

That is why I find it interesting to watch the banking system being rapidly nationalized. Rather than spending untold wealth to restore it to health and return it to the private sector, it needs to be broken up and distributed to the various levels of government, from counties and towns, to cities and states, with some degree of federal oversight of the banks and control of the currency.

The problem with Capitalism is that money is saved by investing it. This means loaning it to someone else. Therefore total savings are determined by how much can be prudently loaned, not by how much can be reserved from earnings. In order to accommodate surplus savings, loan standards were lowered and fantasy investment vehicles were created, creating an old fashioned credit bubble, enhanced by modern technical proficiency. That is why it is necessary to understand money as the public commons/wealth that it is, not the private property we have been led to believe. As an analogy, you own your house, car business, etc. but not the roads connecting them. Money is similar to the roads. It’s the interchangeability that makes it work. It is both medium of exchange and store of value, but as store of value it amounts to fat cells in the economy. Necessary in moderation, but dangerous in excess.

Viewing money as a public utility would incline us to store wealth in our communities and environment, rather than drain value out to put in a bank. Like democracy and the theological point I made, it’s about strengthening the bottom up growth process, rather than enabling the top down control mechanism.

How about this? The government purchases Gotham’s toxic assets (even at a fire sale price) and most importantly, certifies, after proper examination, that Gotham’s balance sheet is clean. Then private investors recapitalize the bank.

Your column “Wall Street Voodoo” was great.
There are many problems with our banks and they all emanate from poor management and poor regulation. In the end shareholders are not the victims, they are the cause. The shareholder is ultimately responsible for supervising management. The shareholder has a Board of Directors as a tool to represent their interest, but as owners, the buck stops with them.
Sure there are cases where management hid their actions from The Board. Sure there are instances where The Board did not represent the interest of shareholders. These circumstances can be the subject of law suits. We have a relatively well functioning legal system. Let it work.
As we all know, the problems rampant in the banking system are the result of everyone involved playing a nationwide game of musical chairs. The borrower thought home prices could only go up. The mortgage broker got his fee and did not have to be concerned that the buyer was not a good risk. The lender wanted their fee and did not care about the quality of the asset because they were going to sell the loan. The investment banks that put together the CMOs just wanted their fee. The stupid ones held on to the CMOs.
Nationalization of the banking system would not be the first step towards “socialization”. It would be the first step back to a functioning capitalist system. It would be the first step back to the regulated capitalist system that has served our country well.
Nationalization would immediately truncate all questions about deposit safety. Nationalization would give the regulators time to plan for an orderly re-privatization of the system. Nationalization would wipe out the old shareholders but it would remind future shareholders that they are more than just playing craps at a casino. Future shareholders will be owners.

Isn’t the bailout for the banks equivalent to Hoover’s RFC? Giving money to the banks rather than the unemployed. And won’t the purveyors of the plan have the same fate as Hoover? Does anybody have sympathy for their bank? The bank who refuses to make loans to long-term customers, who refuses to ease loan terms, who places 5 day holds on customer deposits. How could the Democrats who are promoting this plan be so tone deaf.

After reading your column today…I just have one question for all those who think shareholders deserve their investments wiped out. Aren’t we also taxpayers? Don’t many of us own bank stocks is our mutual funds, that are OUR savings for the future? Why are shareholders now the bad guys…it is the management, not the little stock holder. I get cutting dividends, even though some people older than me are probably depending on these dividends for income..but wiping out the shareholders of Banks that were for so long considered Blue Chips..not exactly like the greed investors had over the Dot com boom. When did small investors become the bad guys here , that deserve to have their savings wiped out?

I dunno. It sounds like my overpriced house, which has lost over 25% of its “value” is likely to regain value when they start paying “fair market” prices for everybody else’s overpriced houses.

If house prices are determined by comparative sales, this will benefit the people who had a little savings account so they could survive a few months without going under. Meanwhile, a lotta banks have taken hold of a lotta property and will be able to write down their losses for several years.

Like I said yesterday, more smoke & mirrors to fool the unsophisticated taxpayer (many of whom couldn’t even successfully calculate 50% off of $300 item in a recent poll according to the your paper) into believing “they’re doing everything they can to fix things” when in reality they’re just bailing out the very bad actors who got us into this mess. We are on a road to ruin with this strategy. I heartily backed and voted for O but if he doesn’t take bold action that benefits taxpayers over corporations and banks, he will go down with the ship.

All of this talk about rescues for banks seems to me to be wrong-headed. It seems like we are throwing good money after bad, and we don’t know (and won’t know until possibly it’s way too late) how much it would cost if we wanted to fix those banks.

It seems like banks are illiquid, which is causing a problem with the economic vitality of the country. The most direct way to solve a liquidity problem is to set up a new bank with a clean balance sheet, let investors buy capital in that bank, and let that bank go forward and help solve liquidity.

Nobody will touch the toxic assets of existing banks, because nobody knows how bad those loans (the loans supporting the CDOs, etc) will perform. These assets need to ride out to maturity.

Bankers who bought these CDOs and other toxic assets, and the people who invested in banks, or made loans to banks, who engaged in this foolishness, need to take a big hit, or they will do it again.

Start fresh with new banks and new investors, let the old banks and their investors take the hit for damaging the system, and let’s all move forward.

Establish a National Bank with a 10-year sunset provision. [It will prove so popular it will be difficult to shut down.] In conjunction with the bank, reopen postal savings (lost track but should be in excess of 20,000 offices).

Under what seems to be the current proposed plan the same people whose greed helped create this problem will once again feed at the trough. That is, the same banks that created this junk will now just come to the “bad bank” and re-buy these same junk assets at bargain sale prices and then package and re-sell them again.

The biggest benefactors of Resolution Trust were the Investment Banks who were buying assets (mostly mortgages) from RTC for pennies on the dollar and selling them as “Mortgage Backed Securities”.

A close look at what the banks did in the early nineties would probably reveal that this was the fuel that ignited what, if not handled properly now, will turn out to be just a stepping-stone to the next feast.

After reading your NYT column today, all I can say is that shenanigans like those you describe are better explained in political terms than in economic ones.

In my opinion, there’s no difference these days between Wall Street owning the government, and the government owning Wall Street. The same people get paid either way.

The Congress pays its friends. So does the administration. What have the people done for them lately, except elect them? As they see it, that makes us idiots, not reliable partners in their common enterprise, which is robbing the treasury.

You see this everywhere you look. You see it in Universal Health Care which looks first to endorse the AMA’s artificial shortage of physicians, maintain inflated drug prices, and preserve the insurance industry’s profitable inefficiencies. You see it in an auto industry bailout which looks first to beggar autoworkers and destroy their unions, and in wars outsourced to Halliburton and Blackwater with funds hidden from the taxpayers, and for which no accounting is ever done anywhere.

In better times, one could count on the fact that government, the central government which so terrifies Republicans, would act in the interest of the people as a whole, and counterbalance the worst depredations of our malefactors of great wealth.

These are not better times. The very idea of Social Democracy becomes meaningless if elections can be turned into circuses, and the government refashioned into a self-referential service agency for enemies of the people.

Exactly that is what the Republicans have spent the last forty years doing to the government of the New Deal — with the whole-hearted collusion, it must be said, of latter-day Democrats who couldn’t turn down an invitation to the banquet, even if they didn’t manage a seat at the head table.

Persuading members of Congress that the economic theories currently fashionable in Washington are nonsense is all very well and good, but if we want to live through this, taking a flamethrower to them and all their works might be more to the point.

Nationalization, segregation of the “toxic” assets into a “bad bank”, etc all sounds very good (much better than anything else I’ve heard of.)

But what about the “de-nationalizing” process? Should the opportunity be taken to avoid banks “too big to fail”? What about regulatory capture, where the regulators and banks become so intertwined that regulatory oversight fails?

I see simplicity as being the advantage of nationalization, the simplicity of being able to untangle the toxic assets from the ongoing financial relationships that the real economy depends on. What kind of simplicity should be applied to the de-nationalization process? Geographic? Functional? Total value of assets under management?

For the record the first time I’ve seen this proposal i.e. to nationalize the large banks is by Thomas Ferguson and Kenneth Johnson in the nation about October. who is the cheif economist of Senate Financial Services Committee. I am skeptical that it would happen for political reasons. its more noticiable now but Citibank had already been effecively bailed out during the Latin American Dept fiasco some 20 years ago. After all preventing this type of nationalization is what approximately 10 to 25% of all political campaign contributions pay for.

Absent vested interests and polticial pressures economic crises are easy to solve in a variety of ways, however with them in the equation they are near impossible. Figure out how to get a Swedish Style or RFC Style solution to the banking crisis though the political system and it will be worth 10 Nobel prizes. Contrary to Bernanke, fiscal stimulus may be the only place where its at.

Speaking of today’s column, what you do think of simply making all future securitization of mortgages illegal? That is, what is out there stays out there until it pays off its obligations, but no new mortgage-backed securities may be sold.

First, it seems to me that the mechanism is feeding the cascading run of foreclosures. The legal problems related to fiduciary responsibility militate against renegotiating rates, partial forgiveness of debt, or any other change in the original terms. Once securitized, any troubled mortgage dies a death of foreclosure because there is no tenable alternative without government intervention, and that intervention does not have any legal form to date.

Second, this bundling of risk demands an equilibrium assumption that has been proven to be unrealistic. The models that made bundling an effective risk mitigation technique did not allow for any serious or protracted disequilibrium. Also, the models that were popular suffered from a fundamental: They did not analyze data over a long term or consider the problem of extreme values.

(Note: This is the same statistical modeling problem that goes with predicting “100-year floods” and other extreme values that have to be considered when we do risk mitigation planning like determining how high and wide to build a levee along the river–the financial risk modelers really weren’t practicing risk modeling in the emergency planning and infrastructure development sense of the term..)

Third, securitization was a camouflage for moral hazard. Brokers, banks, and others were simply trying to hide their bad loans by bundling them with good loans. Without securitization, these loans never would have been made in the first place.

I am sure there are other points to make, but I have gone on long enough for a blog….

My question, I hope, is simple: In the absence of taking the mortgage-backed security out of the mix, how can we expect to not see another collapse from an identically “irrational exuberance” in the future?

Clearly, the main lesson we have learned is that an unregulated financial system will invent ways to destroy itself quite effectively. Even though we cannot constrain yet to be imagined schemes, can we at least agree that there are known schemes that offer such potentially great harm that we have to make them illegal?

I hope you have the opportunity to address this issue in some detail since we have a duty to protect future generations.

Nationalization of the failing banks appears to be the best way to bring some stability to the financial markets. If the banks are nationalized the creation of a “bad bank” and finding a “fair” price for the toxic assets become irrelevant. But since the idea of removing the toxic assets from the bank balance sheets appears to be gaining ground again, here is a suggestion for valuing the toxic assets.

Since most of these toxic assets (as of now) are backed by home mortgages, the first step is to determine the actual values of the homes that correspond to these mortgages. Fortunately, there exists good data on average home prices in most U.S. cities over several decades . Based on the long-term trend one can reasonably estimate what the price of, say, a two bedroom apartment in a particular city should have been in 2005 in the absence of the housing bubble. If this price is $70,000 and the apartment was purchased for $100,000 (because of the bubble) the assets backed by that mortgage should be devalued by 30%. In other words, the government can purchase this toxic asset at 70% of its nominal value. In this way, the assets backed by mortgages made in the peak years of the bubble will be devalued the most.

One might think that this is not as simple as it sounds because the banks have chopped up these mortgages, bundled them and sold them as securities to investors. But, in fact, it makes it easier because one need not look at price inflation due to the bubble in individual cities but consider only the overall national trend. This is so because these securities are likely to backed up by a combination of mortgages held all the way from San Diego to New York. The only thing that need to be taken into account for valuing the toxic assets is the year in which the mortgages backing them were made. It is possible that mortgages made in multiple years may be backing a particular tranche of bonds, in which case a weighted average may be used to revalue them.

Once the government purchases the toxic assets it can modify mortgages to values consistent with home prices based on long-term trends. This will provide an incentive for people to stay in their homes and reduce the foreclosure rates.

But, irrespective of the method chosen to value the toxic assets, a government buy out of these assets will most likely end up being a big giveaway to the banks. In fact, it may well be the entire point of this exercise.